Mapping Japan’s Economic Future · The map suggests three plausible scenarios: Abenomics,...
Transcript of Mapping Japan’s Economic Future · The map suggests three plausible scenarios: Abenomics,...
Mapping Japan’s Economic Future
Takuji Okubo Chief Economist, Japan Macro Advisors (Japan Risk Forum member) [email protected]
Main takeaways from our analysis
2
1. Abenomics succeeded in taming the deflation for now. But, its sustainability is still in question.
2. Our framework “Japan Risk Typhoon Map” helps us formulate Japan’s future path scenarios.
3. The map suggests three plausible scenarios: Abenomics, Stagflation and Back to Deflation
4. In our mid-2013 assessment, Abenomics scenario was dominating the two others.
5. We are in the process of implementing year-end assessment. Early indications suggest that
Abenomics still dominates but the stagflation scenario is gathering force at the margin.
Note: The framework of “Japan Risk Typhoon Map” is a product from an ongoing discussion in Japan Risk Forum, a Tokyo-based voluntary association of experts in the field of risk managements. Its members includes risk officers from major financial institutions, regulators as well as academic and business economists.
3
2014 2009
Source: Cabinet Office, JMA
Mapping Japan’s economy “Japan Risk Typhoon Map contains three fundamental elements of the economy: Growth, Inflation and Public debt. Between 2009 to 2012, Japan has been moving away from the depth of deflation. But, as the red arrows indicate, the recovery was managed at the cost of rapid deterioration in the fiscal burden.
What future awaits Japan?
4
The structure of the map indicates that there are four representative future scenarios for Japan. In our view, three of them, namely 1) Abenomics to succeed, 2) Stagflation, 3) Back to Deflation, are plausible scenarios.
Three future scenarios for Japan: (1) Abenomics to succeed
5
Abenomics to succeed A combination of monetary easing and structural reform raises Japan’s growth rate to the average of 1.5% between 2013-2020. GDP
gap turns positive in 2016. Structural reforms raise Japan’s potential growth rate to 1.2% by 2020. A robust growth coupled with
moderate fiscal tightening enables Japan to stabilize its debt to GDP ratio in 2020.
2020 2012
Abenomics to succeed: Projection table
6
Three future scenarios for Japan: (2) Stagflation
7
Japan suffers from stagflation A combination of monetary easing and fiscal stimulus enables Japan to grow by 1.2% on average between 2013-2017. Japan fails to
raise its potential GDP growth rate however. A robust domestic demand and relatively weak external demand lead to a sizable current
account deficit, causing yen to depreciate. As the inflation rate rises toward 4%, the BoJ is forced into a rapid tightening. Insufficient
domestic saving leads to high interest rates depressing growth as well as forcing the fiscal policy to tighten between 2018-2020.
2020 2012
Japan to suffer stagflation: Projection table
8
Three future scenarios for Japan: (3)Back to deflation
9
Fiscal austerity put Japan back into deflation The fiscal tightening to be implemented in 2014 depresses Japan’s growth as well as its inflation expectation. Asset prices deflate with
rising yen. While interest rates remain low with a flat yield curve, the low growth and persistent deflation cause the net debt to GDP
ratio to rise toward 200% by 2020.
2020 2012
Back to deflation: Projection table
10
Where the wind is blowing?
11
Risk Scoring Vector says Abenomics seems to be winning over the alternative scenarios (mid-2013 assessment) Risk Scoring Vector is a scoring framework where we (Japan Risk Forum) judge the current direction of the Japanese economy based on
27 variables. The variables includes economic/financial indicators as well as a few judgment variables on the direction of policies such
as deregulation.
(Appendix 1) Mapping Japan’s economy (1987-2002)
12
X axis: Growth, Y axis: Inflation, Circle: Net public debt to GDP • 1987-91: Higher growth, higher inflation, improving fiscal indebtedness • 1991-96: Growth and inflation falter in the aftermath of real estate and stock bubble bursting • 1996-2002:Weaker growth, deflation and rapid deterioration in the fiscal health
2002 1987
Source: Cabinet Office, JMA
13
Source: Cabinet Office, JMA
X axis: Growth, Y axis: Inflation, Circle: Net public debt to GDP • 2002-2007: Growth returns to Japan, with an easing in deflation/fiscal deterioration • 2007-2009: Great recession put Japan back into deflation with a sharp fiscal deterioration • 2009-2014: Growth returns with less deflation, but Japan moves deeper in debt
(Appendix 2) Mapping Japan’s economy (2002-2014)
2014 2002
IMPORTANT DISCLAIMER
IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of
an offer to buy or sell, any securities and including any expression of opinion, has been obtained from or is based
upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Japan Macro
Advisors (“JMA”) believe it to be clear, fair and not misleading. Each author of this report is not permitted to trade
in or hold any of the investments or related investments which are the subject of this document. The views of JMA
reflected in this document may change without notice. To the maximum extent possible at law, JMA does not
accept any liability whatsoever arising from the use of the material or information contained herein. This research
document is not intended for use by or targeted at retail customers. Should a retail customer obtain a copy of this
report they should not base their investment decisions solely on the basis of this document but must seek
independent financial advice.
14